Economics darken future of nuclear power

This year, Credit Suisse produced an analysis for investors titled "Nuclear... the Middle Age Dilemma? Facing Declining Performance, Higher Costs and Inevitable Mortality." It found that the amount of time reactors spent offline went from 8.3 percent in 2008 to 13.5 percent in 2012.

Just a few years ago, the president of the United States was championing a nuclear renaissance and the co-founder of Greenpeace agreed that splitting atoms was part of our low-carbon energy future. San Onofre Nuclear Generating Station was preparing to install a quartet of the largest steam generators ever built, and officials were expected to ask the federal government for a 20-year extension on its operating license.

Then came the Fukushima disaster in Japan. And the mysterious degredation of San Onofre's brand-new, $671 million steam generators. And the stunning decisions to permanently shut down not only San Onofre's two reactors, but, a bit further afield, the Kewaunee Power Station in Wisconsin and the Crystal River Nuclear Plant in Florida.

It's barely half over, but 2013 is already witness to the largest premature retirement of reactors in the history of the nuclear industry – and about one-third of the aging nuclear plants in the United States are at risk of following suit, according to a steely-eyed economic analysis by Mark Cooper, a senior fellow at the Institute for Energy and the Environment at Vermont Law School.

Among the vulnerable is California's only other nuclear power station – Diablo Canyon, currently fighting for its life and a license extension, in San Luis Obispo.

"The lesson for policy makers in the Economics of old reactors is clear," wrote Cooper in "Renaissance in Reverse: Competition Pushes Aging U.S. Nuclear Reactors to the Brink of Economic Abandonment." "Nuclear reactors are simply not competitive. They are not competitive at the beginning of their life cycle ... and they are not competitive at the end of their life cycles.... They are not competitive because the U.S. has the technical ability and a rich, diverse resource base to meet the need for electricity with lower cost, less risky alternatives. Policy efforts to resist fundamental economics of nuclear reactors will be costly, ineffective and counterproductive."

The old plants are simply growing creaky, requiring expensive repairs that just don't pencil out, as San Onofre's experience illustrates. Nails in this nuclear coffin include a dramatic drop in the price of natural gas, which is expected to remain low for at least a decade; and a drop in demand for electricity, thanks to more stringent building standards and more efficient appliances, Cooper said.

"Safety is an evolving concept in nuclear power because the power source is so volatile and dangerous and the Technology to control it becomes extremely complex," he wrote. "Over time, external challenges and internal weakness are revealed. The threats to Public Health and safety cannot be ignored. Responding to them becomes particularly costly for existing reactors, since retrofits are difficult. As older reactors become farther and farther out of sync with the evolving understanding of safety, the challenge grows."

'INEVITABLE MORTALITY'

Cooper's work underscores what analysts for Wall Street investors have been whispering to the moneyed since shortly after Fukushima became a game-changer.

UBS Investment Research warned shareholders that smaller reactors in deregulated markets could become too expensive to operate and maintain and might have to be retired early, thanks to competition from low-priced natural gas generators.

Moody's Investors Service concluded that "the reliability of aging nuclear power plants is increasing as a credit concern for some U.S. utilities, both public and investor owned," in an analysis titled "Low Gas Prices and Weak Demand are Masking US Nuclear Plant Reliability Issues."

And just this month, they proclaimed that lower prices and higher repair costs are driving nuclear retirements.

With the Nuclear Regulatory Commission poised to demand expensive post-Fukushima safety upgrades at the plants, and with environmental mandates poised to bar them from using ocean water to cool their systems (reducing the destruction of sea life could require the construction of expensive cooling towers), the prospects for nuclear look rough.

"Economic reality has slammed the door on nuclear power," Cooper wrote. "In the near-term, old reactors are uneconomic because lower cost alternatives have squeezed their cash margins to the point where they no longer cover the cost of nuclear operation. In the mid-term, things get worse because the older reactors get, the less viable they become. In the long term, new reactors are uneconomic because there are numerous low-carbon alternatives that are less costly and less risk(y)."

NOT OVER YET

The nuclear industry does not embrace predictions of its imminent demise.

"The heat wave affecting tens of millions of Americans in the eastern United States is a blanket of muggy reality that shows the irrelevance of Cooper's speculation," said Steve Kerekes, spokesman for the Nuclear Energy Institute in Washington, D.C., in a prepared statement.

"Throughout this week, all but a handful of the nation's 100 reactors have been operating around the clock at full power. Particularly during periods of extreme weather – hot and cold – nuclear energy facilities are vital to the nation's electricity grid and to the well-being of the American people, especially those most vulnerable to extreme weather conditions like the young, the elderly and those with respiratory issues.

"Judgments about the viability of any given nuclear power plant are business decisions made by individual utilities based on economic circumstances unique to the facility," Kerekes wrote. "The fundamentals in the electricity sector continue to present a strong argument for the value of nuclear energy. Natural gas prices are low now, but historically this fuel source has experienced major price volatility. Electric utilities historically have been reluctant to rely too heavily on any single energy resource and value diversity of supply. Nuclear energy facilities are by far the largest source of electricity that don't emit greenhouse gases and other air pollutants; they provide nearly two-thirds of low-carbon electricity production in the United States."

Nationwide, nuclear provides 19 percent of America's electricity, even after the shutdowns of the four plants, the NEI said.

Pacific Gas & Electric, which owns Diablo Canyon, stressed that the plant is "a safe, clean, reliable and vital energy resource for California and a significant economic engine for San Luis Obispo and Northern Santa Barbara counties," said spokesman Blair Jones in a prepared statement. "The facility provides low-cost, carbon-free electricity for more than three million people, allowing PG&E to deliver some of the cleanest energy in the nation to its customers. Looking forward, Diablo Canyon will continue to play a key role in PG&E's clean power mix for many years to come and will be an important element in helping California achieve its ambitious greenhouse gas reduction goals."

For its part, the Nuclear Regulatory Commission is refusing to gaze into anyone's crystal ball.

"Apart from U.S. nuclear power plants having sufficient resources to meet NRC requirements for safe operation and properly building decommissioning funds, the plants' economic environment is outside the NRC's area of concern," spokesman Victor Dricks told us by email. "The plants are operating safely and the NRC will ensure they continue to protect public health and safety whenever they transition to decommissioning status."

THE FUTURE

One of the factors that puts an aging plants at greater risk of early retirement is local opposition, Cooper noted. And that is precisely what Diablo Canyon faces as it seeks a 20-year license extension from the NRC.

"California is now down to two reactors at Diablo, after early retirement of Humboldt, Rancho Seco, and Units 1,2, and 3 at SONGS," said Rochelle Becker, executive director of the Alliance for Nuclear Responsibility in San Luis Obispo. "The missing risk in Cooper's report for California's remaining reactors is seismic vulnerability."

In 207 pages of testimony before the state Public Utilities Commission, the Alliance argues that owner PG&E has continually sought to downplay the risks of a new earthquake fault found near the plant. Disagreement over precisely what that means to the safe operation of the plant will continue to rage.

The retirement of San Onofre and the other two reactors decreases the number of operating nuclear reactors in the U.S. to 100, and reduces total U.S nuclear summer capacity by 3 percent, the Energy Information Administration said.

It also said that this loss is expected to be offset by the construction of five nuclear reactors with a combined capacity of more than 5,600 megawatts.

The Tennessee Valley Authority's Watts Bar 2 is supposed to be finished in 2015. And last year, the NRC issued operating licenses for four new reactors at two plants: Vogtle, units 3 and 4, in Georgia; and Virgil C. Summer, units 2 and 3, in South Carolina. Target completion dates are between 2016 and 2018, the EIA said.

There are also plans for capacity uprates at several existing reactors, but at least four of them will be delayed, the EIA said.

Analyst Cooper isn't holding his breath.

About half of all reactors ordered or docketed at the NRC were cancelled or abandoned, he found. Of those that were completed and brought online, 15 percent were retired early, 23 percent had extended outages of one to three years, and 6 percent had outages of more than three years.

San Onofre's outage cost about a half-billion dollars.

Cost overruns have been known to double original construction estimates, Cooper said. And while almost three dozen uprates have been approved since 2009, more than half have been abandoned, canceled or put on hold, and half of those that moved forward have suffered major cost overruns.

"(T)he commercial nuclear industry has historically had difficulty executing major construction projects and that problem afflicts aging reactors," he wrote. "The retirement of Crystal River and San Onofre was precipitated by repairs/upgrades that failed badly, resulting in the need for major repairs. The Florida uprates had substantial cost overruns. The Monticello life extension and uprate activity have experienced cost overruns of over 80 percent.”

The bottom line is that "exceptionally high" fixed operating costs make nuclear about three to four times as expensive as a new gas plant, and four to five times as expensive as a coal plant, he said. And the market will come to bear.

"There is always a great desire to predict the future of individual reactors but that is a perilous business," Cooper wrote. "What we can say about the recent past is that in a short period of time the industry has experienced a full complement of the bad things that can happen to old reactors – purely economic retirement, broken reactors, an uprate that developed into a broken plant and an early retirement, large cost overruns for new builds and uprates and abandonment of uprates. We can also identify the circumstances that brought these negative events about and show that they are not only short term aberrations, but are consistent with the long-term history of the industry.

"Ironically," he wrote, "it appears that an unintended consequence of the shift toward markets will be to force the early retirement of the very reactors that a market never would have allowed to be built in the first place."

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